California Taxes: What’s a Fair Share?

April 15, 2013

Today, April 15, is tax day — the deadline for filing California and federal income tax returns. It’s also an opportunity to reflect on the shared investment in our communities that taxes represent.

The dollars we pay to the state in taxes are invested closer to home than you might think. More than 70 cents out of every dollar spent through the state budget goes to local communities to fund public schools and community colleges, health and human services programs, public safety, and more.

While we all benefit from these public investments, the question of who does and doesn’t contribute their fair share provokes passionate debate. Last week, the CBP released our annual tax day report, Who Pays Taxes in California?, a snapshot of how tax payments — and tax breaks — are distributed among Californians.

The simplest answer to the question posed by the report’s title is that we all pay California taxes in some form. California households of all income levels pay sales taxes on most purchases, including household staples like soap and tissue. Those of us who drive pay fuel taxes. Californians who consume beer, wine, or cigarettes pay the alcohol tax or the cigarette tax on those purchases. Homeowners pay property taxes — and renters do, too, since this cost generally gets passed on in the form of higher rents.

The thornier question is how the overall tax bill is distributed among various income groups, and whether that distribution is fair. (For an in-depth discussion of tax fairness, see our recently released report Principles and Policy: A Guide to California’s Tax System.) Here at the CBP, we believe a stronger case can be made for a progressive tax structure — in which higher-income households pay a larger share of their incomes in taxes — than for a proportional (“flat”) tax structure, in which all households pay the same share of income in taxes, or a regressive tax structure, in which lower-income households pay a larger share of their incomes in taxes.

But as we report in Who Pays?, when all California taxes are taken into account, a family making $13,000 a year pays a larger share of their income in state and local taxes, on average, than a family making $1.6 million a year.

Even factoring in Proposition 30’s temporary tax increases, which on the whole are progressive, California’s overall tax system remains modestly regressive. The lowest-income families pay the highest share of their incomes when all state and local taxes are counted — including regressive taxes such as the sales tax and alcohol and tobacco taxes.

Another important consideration is who benefits from the spending that occurs through the tax code in the form of exemptions, deductions, credits, and exclusions. Here again, the simple answer is all of us. For instance, anyone who has ever bought groceries or filled a prescription in California has benefited from the fact that many purchases — including food and prescription medicine — are exempt from the sales tax.

However, corporations — especially large corporations — receive outsized benefits from spending in the tax code. For the corporate income tax, the revenue loss from tax expenditures is almost 80 percent of the actual revenues collected from the tax. This is substantially greater than the percentage of revenue lost from tax expenditures for either the personal income tax (54 percent) or the sales tax (48 percent).

The CBP has always emphasized that California’s budget embodies our choices and values as a state. The same is true of our tax system. On tax day, and every day of the year, it’s worth shining a light on certain aspects of the state’s tax system and reflecting on whether we are making the right choices. Does asking the lowest-income Californians to pay the most in state and local taxes, and delivering a large share of tax benefits to corporations, truly represent the vision and priorities of California’s residents?

— Hope Richardson

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New From the CBP: Who Pays Taxes in California? and a Guide to the State’s Tax System

April 12, 2013

Taxes represent our collective investment in our communities and our quality of life. They support our public schools, streets and highways, public hospitals, parks and beaches, and the public health infrastructure that ensures that our food is safe to eat and our water is safe to drink, as well as a range of other systems and services.

As tax day approaches — the day Californians are required to file their income tax returns — a new CBP analysis examines who pays taxes, who doesn’t, and how California’s tax system compares to those in other states. Who Pays Taxes in California? shows that even with the temporary tax increases put in place by voter approval of Proposition 30, California’s lowest-income families still pay the most in state and local taxes as a share of their incomes. The report also shows that over the past three decades, more of the cost of funding state services has shifted from corporations to personal income tax filers.

The CBP is also pleased to be releasing — in advance of tax day — a comprehensive overview of the state’s tax system. Principles and Policy: A Guide to California’s Tax System explains fundamental concepts in tax policy, examines the types of state taxes paid by individuals and businesses, and discusses key trends, policy issues, and options for reform.

– Steven Bliss

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Key Facts About the Governor’s Proposed Budget, Part 1: Voters Boost Revenues by More Than $7 Billion in 2013-14

January 17, 2013

Last week, we published our initial analysis of Governor Jerry Brown’s proposed 2013-14 budget. To highlight some of the most important aspects of this proposal — and the context for it — today we’re launching a brief chart series, Key Facts About the Governor’s Proposed Budget. This first post looks at the impact of the new revenues approved by California’s voters this past November.

*  *  *

The Governor’s proposed 2013-14 budget shows that California is poised to turn the corner on years of severe budget shortfalls. One of the biggest factors contributing to this positive trajectory is voters’ approval of two revenue measures — Propositions 30 and 39 — last November. Proposition 30 increased personal income tax rates on very-high-income Californians for seven years and raised the state’s sales tax rate by one-quarter cent for four years. Proposition 39 ended a corporate tax break that primarily benefited a relatively small number of (mostly large) multistate firms.

State finance officials project that the two measures combined will raise $7.2 billion in 2013-14 (the fiscal year that begins July 1), accounting for more than 7 percent of total General Fund tax collections. In other words, had Propositions 30 and 39 not passed, 2013-14 tax collections would fall from $97 billion to less than $90 billion.

In addition to significantly lowering revenues for 2013-14, defeat of both ballot measures would have caused revenues in the current fiscal year (2012-13) to drop by nearly $6 billion. What would have been the impact of such a large revenue decline? The 2012-13 budget agreement passed last June provides an answer: Lawmakers approved roughly $6 billion in spending reductions to be implemented on January 1 of this year if voters had rejected Proposition 30, with public schools, community colleges, and universities bearing the brunt of these “trigger” cuts. (Proposition 30’s revenues were assumed in the 2012-13 spending plan; Proposition 39’s were not.) Moreover, it’s reasonable to assume that, in the absence of other revenue options, a comparable level of reductions would have been carried over to the 2013-14 fiscal year — and perhaps beyond.

Much work remains to be done in rebuilding the foundations of a strong California economy and healthy communities in the wake of the Great Recession and years of state spending cuts. But for now, thanks to California voters, the state budget has been stabilized and provides a platform for reinvesting in education and other public systems and services that are essential to all Californians.

– Scott Graves

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New CBP Video: Proposition 30 Would Move California Toward More Broadly Shared Prosperity

November 1, 2012

In this brief video, CBP Deputy Director Alissa Anderson discusses the importance of Proposition 30 in the context of widening income inequality in California. Proposition 30, which will appear on the November 6 statewide ballot, would raise significant new revenues through temporary tax increases that would largely affect the wealthiest Californians.

This is the latest in an ongoing series of videos from the CBP highlighting key issues and trends in budget policy and what they mean for individuals, families, and communities statewide.

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Proposition 39: Should Corporations Choose How They Are Taxed?

November 1, 2012

During the recent recession, when state revenues were at their lowest level as a share of the economy in more than three decades, lawmakers quietly passed a set of significant tax cuts that benefit a small number of large corporations at a cost of more than $1.5 billion a year to our state budget. Proposition 39, one of the measures on the November 6 ballot, singles out the largest and most costly of these tax cuts for public scrutiny. The CBP recently released an analysis of the measure, which would end the state’s current policy of allowing multistate corporations to choose the more favorable of two methods for determining their California income tax.

Under a system known as “optional single sales factor apportionment,” in effect since 2011, multistate corporations operating in California are allowed to choose the more favorable of two methods for determining what share of their income will be subject to state tax. Proposition 39 would change the law so that nearly all multistate firms would be required to calculate the share of their income subject to the state’s corporate income tax the same way: based on the percentage of their total sales that occur in the state. The proposed new system, called “mandatory single sales factor,” has been adopted by almost half of all US states.

Starting in 2013, Proposition 39 would result in an estimated $1 billion annually in additional state revenues, an amount expected to grow over time. From 2013-14 through 2017-18, half of these dollars would be used to fund energy efficiency and clean energy initiatives. After 2017-18, all the dollars would be deposited in the state’s General Fund. Proposition 39 is also expected to increase school funding because significant growth in General Fund revenues tends to boost the state’s minimum funding guarantee for K-12 education and community colleges.

The current system for taxing multistate corporations neither encourages firms to locate in California nor offers an incentive to hire Californians. Instead, it provides an arbitrary tax break for multistate firms by letting these corporations choose the most advantageous formula for calculating their annual tax bill. Currently, California is one of only two states that allow corporations to choose each year between single sales factor and another tax apportionment formula based on the firm’s property, payroll, and sales in the state. All other states that have adopted single sales factor have made it mandatory – either for all corporations or for certain categories of firms. States that have adopted the mandatory approach provide both a “carrot” and a “stick”: the carrot of lower taxes for firms that locate in-state and export out-of-state and the stick of higher taxes for firms that sell to the state’s market without locating a proportionate share of property and payroll there.

In the CBP’s analysis of Proposition 39, we find that the largest firms would provide the majority of Proposition 39’s new revenues. Firms with gross annual receipts over $1 billion would provide approximately 70 percent of the revenues. In a given year, only about 2 percent of all corporations doing business in California would likely be affected by the tax change.

Proposition 39 has its drawbacks: It includes an exception that specifically favors cable companies, and it dedicates a share of its revenues to specific, inflexible uses (namely, renewable and clean energy projects). Voters will need to weigh these concerns against the fact that Proposition 39 would revoke a sizeable and unnecessary corporate tax break and bring in $1 billion a year in new revenues, helping to stave off deeper cuts to California’s vital public systems and programs.

– Hope Richardson

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